Insurance brokers: the truth behind the façade

Advertising would suggest that going online or direct to the insurer for commercial cover is a straightforward and cost-effective way of buying cover. Worryingly, research from BIBA (British Insurance Brokers Association) found that a third of the micro SMEs not using the services of an insurance broker failed to realise they were not being advised and were probably only being offered products limited to a single insurer or provider.

This lack of understanding has to be of concern. This cover may not be the best for the purchaser’s business. Business owners are often far too time pressed to read all of the conditions of an insurance policy. Businesses as a result could find themselves unwittingly unprotected if they have not had certain terms and exclusions pointed out to them or understood security requirements, for example. Sadly, all too often, that happens when a business needs the protection offered by their policy the most – when a claim has arisen.

Eric Galbraith, BIBA’s Chief Executive, said: “It is clear there is confusion among commercial buyers of insurance and we have suspected this for some time. It is worrying to think these firms could end up with inadequate or even the wrong cover because they did not receive advice or a recommendation.”

The commercial insurance market is cut-throat in its competitiveness with many different distribution channels vying to get the customer’s business. That competition means that businesses have plenty of choice when it comes to buying insurance, but it needs to be the right cover, warns BIBA. Having suitable insurance in place is vital. Business owners should always check that adequate cover is being purchased by asking if the policy offered is a recommendation, if it is suitable for their specific needs or by obtaining advice from a broker.

Brokers take time to learn about the insurance needs of a specific business and can offer a full range of professional services including risk management, recommending insurers for their quality and not least, provide assistance in the event of a claim. There are many occasions, where had it not been for the intervention of a broker a claim would have either been refuted or reduced payment made by the insurer.

The research confirmed high satisfaction levels with those businesses that chose to use the services of a broker, with 95 percent of SMEs saying they are likely to do so again for their business insurance when their policy next falls due for renewal. How the broker gets paid for those services has been a source of much discussion in the insurance industry recently. The Financial Services Authority (FSA), which is responsible for regulating the activities of the insurance industry, has been seeking greater transparency about the level of commission earned by intermediaries when selling insurance, the type of services they provide and the relationship that they have with insurers.

The FSA argues that this information is needed to ensure that the buyers of commercial cover make a better informed decision about the most appropriate insurance product for their business. The upshot of all this has been the publication of industry guidance which aims to ensure that the buyers of commercial insurance are provided with clear information about the capacity in which their chosen intermediary is acting i.e. are they working for the insurer or the customer or in some cases for both, the services being provided and the remuneration they have received for them. The development of this guidance has been led by BIBA in co-operation with the other trade bodies in the insurance market such as the ABI, IIB, LMA and LIIBA.

Customers buying commercial insurance should be made aware of their right to request commission information by their intermediary. The guidance gives brokers direction on how they can give prominence to this right as research from the FSA has shown that a significant number of commercial customers are unaware that they have the right to know how much remuneration their broker receives on their particular policy.

The guidance also seeks to ensure that commercial customers have clearer and more comparable information about the commissions that brokers and intermediaries receive as well as the services that are being provided. This includes information about the breadth of search that the broker has undertaken in order to find an insurance product for their customer. Where a broker has used the services of another intermediary in the placing of the insurance then the commercial buyer should also be made aware of their presence.

The FSA’s rules require all authorised firms to take all reasonable steps to identify conflicts of interest between themselves and a client. Brokers will face a conflict where their own interests conflict with those of a commercial customer; or a broker is unable to act in the best interests of one commercial customer without adversely affecting the interests of another commercial customer. Consequently, a large part of the guidance is devoted to helping brokers to manage the conflicts of interest that may arise from commercial relationships.

BIBA will be working hard with the industry to ensure that this guidance is adopted and becomes embedded in to the day-to-day practices of intermediaries so that it becomes business as usual for them. The FSA’s supervisors will be reviewing how effective the guidance has been and whether it is achieving the desired outcomes for customers in 2010/11.

Galbraith concluded: “Commercial customers should expect to receive disclosures that are clear and accurate
and this industry guidance should play an important part
in helping achieve this.”

BIBA’s SME research – key findings
Lack of understanding as to what constitutes advice There is a lack of understanding among SME business owners to what advice entails; 33 percent of SMEs not using a broker to arrange their business insurance did not understand that they were not receiving advice and were probably only being offered a single product.

A majority of those not using brokers
think a ‘suitable’ product is being sourced Among both those who use a broker and those who do not, there is confusion as to where they can obtain advice; 63 percent of SMEs who did not use brokers said they received the service of identifying a suitable secure insurance policy and specialist advice.

Clients appreciate that taking the cheapest option may not be the best move We found that SMEs who use brokers understood that the cover provided by the policy was as important a factor in the buying decision as was the total cost. In our sample 84 percent, thought that the cover was very important. As far as cost was concerned, only 67 percent thought this was very important. Clearly, SMEs using brokers appreciated that in the commercial market cheapest is not always best.

Brokers understand their SME clients’ businesses More than two-thirds of SMEs (who used a broker) regarded it as very important for their broker to understand their business. When asked whether their broker understood their needs in terms of risk exposure and protection of assets, an overwhelming 92 percent said they did, 89 percent felt using a broker allowed them to focus on their business.

For more information
Find BIBA broker at biba.org.uk and a copy of the industry guidance can be found at: biba.org.uk/PDFfiles/IndustryGuidanceFINAL.pdf